The costs to construct a building increase disproportionately with the size of the building. A building of q square feet costs $0.10 x q^2 to build. After you construct a building on the lot, it will last forever but you are committed to it: You cannot put another building on the low. Buildings currently rent at $100 per square foot per month. Rents in this area are expected to increase in five years. There is a 50% chance that they will rise to $200 per square foot and stay there forever, and a 50% chance that they will stay at $100 per square foot per month forever.? The cost of capital is fixed at 12.0% per year.
a) Should you construct a building on the lot right away? If so, how large should the building be?
The monthly discount rate is _____% (Round to five decimal places)
For the case of $200 per square foot per month rent the building should be _______ sq. ft. (Round to nearest integer)
For the case of $100 per square foot per month rent the building should be ________sq. ft. (Round to nearest integer)
b) If you choose to delay the decision, how large a building will you construct in each possible state in five years?
If you wait then the NPV of building in $200 sq. ft. state is $_____ million (Round to two decimal places)
If you wait then the NPV of building in $100 sq. ft. state is $_____ million (Round to two decimal places)
The PV today is $_____ million. (Round to two decimal places.)
If we build today, the size of the building should be _______ sq. ft. (Round to nearest integer)
The NPV is $____million (Round to two decimal places)
So, we should build a building of (100/200) sq. ft. (today/in five years)
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